Venture Capitalists Show the Risk Can Be Worth It

Business: Investment in speculative firms has never been greater. High-tech companies are a big beneficiary.

PALO ALTO — The fare was veal, quail and exquisitely braised tuna, the subject was a possible new treatment for chronic hepatitis, and in an upstairs room at a restaurant here in the heart of high-technology country, C. Budd Colby was fielding questions like a tennis champ getting peppered with shots.

"There are a lot of companies working in this field," said one interrogator. "'What do you have that will get you ahead of them?"

"What will happen to your business if a successful hepatitis vaccine is found first?" was the next question. "How good is your patent protection? . . . How do you know this will work? . . . Who has paid for the research so far?"

Finally, Colby--who has a doctorate in genetics, is a pioneer in the cloning of interferon and and is chief executive of a tiny start-up company hoping to develop a treatment for a disease afflicting 100 million people around the world--closed the discussion.

"We've got a cutting-edge technology, really exceptional professional talent and a really big health problem," he said of his company, Cura Pharmaceutical.

It was a grueling encounter in a deceptively urbane setting, a fine dinner followed immediately by the third degree. Entrepreneurs like Colby submit to it--indeed, clamor for an invitation--for one reason: The audience at this once-a-month session represents as much as a half-billion dollars of investable capital on the hoof.

This is the Band of Angels, a society of 60 dues-paying current and former Silicon Valley executives, retired entrepreneurs, bankers and others helping find young companies worthy of their money.

The group takes its name from a term widely used in the venture financing business for individuals investing their own money in high-risk enterprises, usually in chunks of $50,000 to $200,000 per investor. From them an entrepreneur with an intriguing idea can raise as much as $1 million at a shot--often enough to finance the technical studies, market surveys and prototype developments to get a company up and going.

The angels also exemplify a phenomenon that has supercharged the economy of Silicon Valley for much of the '90s: The high-tech community is awash in money.

*

The business of venture capital--private partnerships and well-heeled individuals investing in speculative companies in the hope they will grow into successful, stock-issuing enterprises--has never been better. Over the last two years, start-up companies have been funded at a record pace and have been issuing public stock at record prices.

This in turn has provided those early backers, known as venture capitalists, or "VCs," with record levels of returns. The funds invested in venture partnerships by institutional investors have returned 35% to 60% a year since 1994.

"If you couldn't make money in the venture business in the last two years," said Jack C. Carsten, a former Intel Corp. executive and a founding member of the Band of Angels, "you should find another business."

High-tech's river of green has been fed by a historic surge in demand for commercial technology, coupled with a persistent enthusiasm for high-tech stocks on Wall Street. Initial public offerings of stock by 203 venture-backed companies last year brought in a record $8.2 billion.

What is striking about this freshly minted wealth is the speed at which it is being put to work nurturing new ventures, the development of more technology and the creation of jobs. A large share of the about $15 billion to $20 billion in venture capital raised nationally in 1995 came from former entrepreneurs financing the next generation of high-tech pioneers as they were financed themselves.

"I firmly believe that anyone who's made a lot of money at this should plow it back into the system," said Rodney Perkins, a Band of Angels regular who earned his grubstake from three high-tech start-ups dating back to 1981.

Venture financing is not merely individual, however; it's also institutional. Big investors such as pension funds, university endowments and insurance companies, themselves so flush with bull-market gains that they could never deploy all their holdings via conventional liquid instruments such as stocks and bonds, put a record $7.4 billion into venture pools last year.

With institutional enthusiasm for venture investments at an all-time high, the major venture firms have pulled out all the stops to "get it while the spigot is open," said a report by Asset Alternatives, a Wellesley, Mass., research firm. Registered venture pools have ballooned in size to an average $80 million, up from $50 million in 1990. Some major firms are raising investment funds of $250 million or more.

"These are the 'good old days' of venture capital," said Roger McNamee, an industry analyst at the Menlo Park firm of Integral Partners.